As the relative strength index is mainly used to determine whether a security is overbought or oversold, a high RSI reading can mean that a security is overbought and the price may drop. Therefore, it can be a signal to sell the security.
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Calculating RSI
The RSI uses a two-part calculation that starts with the following formula: RSI_{\text{step one}} = 100- \left[ \frac{100}{ 1 + \frac{\text{Average gain}}{\text{Average loss} }} \right]RSIstep one=100−[1+Average lossAverage gain100] The average gain or loss used in this calculation is the average percentage gain or loss during a look-back period. The formula uses a positive value for the average loss….
Use Buy and Sell Signals That Fit Trends
A related concept focuses on trade signals and techniques that conform to the trend. In other words, using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when a stock is in a bearish trend may help traders to avoid the false alarms that the RSI can generate in trending markets.
Plotting RSI
After the RSI is calculated, the RSI indicator can be plotted beneath an asset’s price chart, as shown below. The RSI will rise as the number and size of up days increase. It will fall as the number and size of down days increase. As you can see in the above chart, the RSI indicator…
What Is the Relative Strength Index (RSI)?
The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. The RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. The indicator was developed by J. Welles…
Example of RSI Swing Rejections
Another trading technique examines RSI behavior when it is reemerging from overbought or oversold territory. This signal is called a bullish swing rejection and has four parts: As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it…
Modify RSI Levels to Fit Trends
The primary trend of the security is important to know to properly understand RSI readings. For example, well-known market technician Constance Brown, CMT, proposed that an oversold reading by the RSI in an uptrend is probably much higher than 30. Likewise, an overbought reading during a downtrend is much lower than 70.2 As you can see…